How should foreign companies defend their IP in China?

The Intellectual Property Court of the Supreme People's Court of the People's Republic of China has started hearing patent-related civil or administrative cases and other IP appellate cases with technical issues as of January 1 2019. This shows China's continued efforts to protect IP and an attempt to establish a more effective system for IP disputes. These efforts have been ongoing since the early 1980s when China introduced modern laws to protect trademarks and patents. Following the implementation of the National IP Strategy (published in June 2008) and the heightened IP awareness of China's domestic market players, as well as legislation, and the further opening up of the Chinese market, the dynamic where foreign parties are often plaintiffs rather than defendants in foreign-related IP cases in China will gradually balance out. Foreign market players in China will face more IP challenges from Chinese competitors in the future.

This article discusses general litigation strategies for foreign market players in China in order to defend against Chinese plaintiffs on IP issues. It is intended to be an introduction to the relevant legislation and practice, rather than advice on the full range of options that may be available in a particular case.

As intangible property, IP has many characteristics different from those of traditional tangible property like a car or real estate. For a foreign company entering a foreign market, one of the most important characteristics of IP it should note is that IP is protected regionally, especially trademarks and patents.

In China, if one wishes to obtain protection for his/her invention or design as a patent, the only way is to file applications before the China National Intellectual Property Administration (CNIPA) and receive patents covering the invention/design granted by the CNIPA. An obvious strategy is to file patent applications in China before the launch of the products. However, one should also be aware that the right granted by a patent is only a right to prohibit others' unauthorised implementation of the invention (technical solution) or design claimed in the patent, but not a right to implement freely such an invention or design. Article 23 of the Interpretation (II) of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Patent Infringement Dispute Cases provides that "where the alleged infringing technical solution or design falls within the scope of protection of a prior patent involved in a case, and the alleged infringer makes a defence that it does not infringe upon the patent right involved in the case because its technical solution or design is granted with another patent, the people's court shall not support such a defence." Thus, it is best for a foreign company entering the Chinese market to also do a freedom to operate (FTO) investigation/analysis to determine the risks of potential patent infringement prior to launching a new product or service in the Chinese market, so that it has a chance to either design around, postpone launching until the expiration of certain prior patents, initiate an invalidation proceeding before the Patent Re-examination Board (PRB) against certain prior patents, negotiate for licensing or cross-licensing, or abandon the current project.

From a defence perspective, in the judicial trial of patent infringement cases in China, the court awards damages according to the nature and circumstances of the infringement. Whether the infringer carried out wilful infringement is also a factor the court considers. If the evaluation result of the FTO investigation/analysis report issued before the launch of the product or service indicated that the technical solution or design under investigation did not constitute an infringement of other patents, even if the product/service is ultimately found to be infringing, such an FTO report will help the defendant to obtain a ruling with a relatively low amount of compensation because the accused infringer did not carry out wilful infringement.

In China, only registered trademarks can be protected by trademark law unless the mark is already well known in China. In a similar manner to the above-mentioned strategy for patents, a foreign company entering the Chinese market should register its marks as early as possible, as well as do a clearance trademark search before launching its brand in the Chinese market, especially when it comes to the Chinese translation of a non-Chinese mark to avoid infringing any prior registered Chinese trademarks.

In China, there are several procedural options for a defendant in an IP infringement case.

In China, there is a limit of three years to file an infringement action (it was two before October 1 2017) from the date the right holder becomes aware or should have become aware of the infringement . However, according to the interpretations issued by the Supreme Court and some precedents, if the right holder commences proceedings after the three year time limit, but the infringing activities persist at the time of the commencement of the proceedings, the court should still order an injunction to be implemented during the period of validity of the patent, trademark or copyright, and compensation for the three-year period prior to the commencement of the proceedings should also be awarded. Thus, most of the time, the right holder has years of time to prepare before starting a formal dispute by filing a lawsuit in court. A foreign company as the defendant, on the contrary, will only have 30 days upon receiving a copy of the complaint served by the court to prepare and submit its response to the court. Since an IP infringement case, especially a patent case always involves technology analysis and product-claim comparison, and even evaluation of the market impact of the case, which may require cooperation from people in the technical department, legal department, sales department, and outside counsel or attorneys, it is essential for the defendant to obtain more time.

A common strategy to buy time for the defendant in China is to raise an objection to the jurisdiction of the court within the 30-day period for response. Under Chinese civil procedure laws, the ruling regarding the objection must be made within 15 days from the date of being docketed. The ruling can be appealed to a higher court, within 30 days after the ruling has been served. The ruling of the appeal should be made within 30 days from the date the case is docketed for non-foreign cases, but there is no such time limit for cases with foreign elements, such as where a foreign company is involved.

Another common strategy in a patent or trademark case is to initiate an invalidation proceeding to invalidate the right which is the basis of the infringement lawsuit. It should be noted that, in China, determination of validity and infringement of a patent or registered trademark is bifurcated, with the Patent Re-examination Board (PRB) or Trademark Review and Adjudication Board (TRAB) determining patent/trademark validity and the people's court determining infringement.

In China, according to civil procedure law, if the trial of a case must be based on the outcome of another that has not yet been concluded, then the case will be stayed or suspended. However, when it comes to a patent or trademark infringement case and a parallel invalidation proceeding regarding the same patent or trademark, the court has the discretion to decide whether to suspend the infringement case or not, and the practices differ according to the type of IP involved and between different courts. Thus far, in trademark infringement cases, there is no clear rule regarding this issue and the court will decide on a case-by-case basis. However, in patent infringement lawsuits, there are rules regarding the factors which affect the discretion of the court:

The time period for initiating invalidation proceedings

Requests for declaring patents invalid must be filed (before the PRB) within 30 days. If the request is filed after 30 days, it will not prima facie satisfy the ground for suspending the infringement proceeding.

Type of patent

According to the interpretations of the Supreme Court, if the basis for an infringement lawsuit is a patent for an invention, or a patent for a utility model or design which has been sustained by the PRB, it is normally assumed that the patent is valid and the court can therefore decide directly not to wait for the result of the parallel invalidation proceeding.

Exceptions for patents for utility models and designs

As per the interpretations of the Supreme Court, in principle, in a case involving a dispute over infringement of a utility model or design patent, if the defendant files a request for invalidation of the patent during the 30 day period of response, the court should suspend the trying of the case. However, under any of the following circumstances, the court may decide not to suspend the action:

The search report or patent assessment report provided by the plaintiff does not contain any cause that leads to the invalidation of the patent for utility model or design.

Evidence provided is sufficient to prove that the technology is in the public domain.

The evidence or reason for a request for invalidation of the patent is apparently insufficient.

The court otherwise deems that the action should not be suspended.

The following defences are commonly raised by accused infringers when facing a patent infringement action:

• defects in plaintiff's right, such as the patent has expired, been abandoned or declared invalid;

• abuse of patent – there is evidence to prove that the patent involved in the case was obtained by the patentee in bad faith;

• the accused product incorporating the technical solution or process does not fall within the scope of protection of the patent;

• inferior technical solution – the technical solution leaves out an individual technical feature of the claim, or replaces a corresponding technical feature of the claim with a simpler or inferior technical feature, and abandons or notably reduces the performance or effect of the claim corresponding to this technical feature, and thus becomes an inferior technical solution;

• estoppels – the technical solution claimed has been abandoned by the applicant or patentee during examination or invalidation proceedings;

• dedication – the technical solution has been dedicated to the public by the plaintiff as applicant because it is described only in the specification or the appended drawings, but not in the claims;

• private use or other non-production/business use;

• research and experimental purposes;

• prior art defence – there is evidence to prove that the technology or design exploited is an existing technology or design in the public domain;

• exhaustion of right – using, offering for sale, selling or importing any patented product or product directly obtained under the patented process after the said product is sold by the patentee or by a licensed entity or individual;

• prior use – having made an identical product or having used the identical process or having made necessary preparations for making such a product or using such a process prior to the application date of the patent, and continuing to make such a product or use such a process within the original scope;

• for the purpose of medical administrative examination and approval (known as the Bolar Exemption);

• obtained from a legal source – whoever, for the purpose of production and business operation, uses, offers for sale or sells a patented product without knowing that the product was produced and sold without the permission of the patentee, is not required to bear the liabilities for compensation, provided that it can be proved that the product is obtained from a legal source.

The following defences are commonly raised by accused infringers when facing an accusation of trademark infringement:

• There are defects in the plaintiff's right, such as, the registered trademark has expired, been abandoned or been declared invalid.

• The alleged infringing mark is not identical or similar to the registered trademark.

• Fair use

• the alleged infringement is fair use of:

• a generic name of the goods;

• the generic design or model of the goods;

• a geographical name; or

• the accused infringer has used its trademark in respect of the same or similar goods and acquired a reputation before the application date of the identical or similar registered trademark.

• Non-compensation defence:

• the registrant has not used the registered trademark within the previous three years and has not suffered any damages because of the infringement.

• obtained from a legal source – the accused infringer has unknowingly sold the infringing goods, and can prove that the goods were obtained lawfully and identify the supplier.

The following defences are commonly raised by accused infringers when facing an accusation of copyright infringement:

• The work at issue is not subject matter protected by copyright.

• Fair use.

• Statutory permission to write and publish textbooks.

• A defect in the plaintiff's right, such as the protection period of the copyright has expired.

• The creation of the accused work originates from a legal source.

• The use of the accused work is based on a legitimate licence.

The following defences are commonly raised by accused infringers when facing an accusation of trade secret infringement:

1) self-development;

2) reverse engineering;

3) personal trust: this is always used in disputes regarding customer lists in medical, legal and other service industries where personal information is key. To raise this defence, one must prove that the customer voluntarily chose to trade with the accused infringer or his/her new employer based on a special trust relationship with the accused infringer.

The Chinese market is still growing and has great potential, which cannot be ignored by companies based anywhere. The competition here is becoming fiercer, and Chinese companies are making remarkable progress in protecting their own IP. Thus foreign market players in China will face more challenges on IP issues from their Chinese competitors in the future. However, no one should be scared. Good research in advance and a good strategy like what we have discussed above will mean foreign companies can do effective business with their Chinese peers.

Victor Guo
		Mr Victor Guo is an attorney-at-law at Panawell & Partners. Mr Guo received his BEng degree in automation science from Beijing University of Aeronautics and Astronautics in 2010, and then studied intellectual property law, receiving his LLB from Renmin University of China in 2012, and his LLM in intellectual property law from the John Marshall Law School in 2014. Mr Guo joined Panawell the same year. Mr Guo specialises in IP customs protection, unfair competition, anti-counterfeiting and anti-piracy, computer and copyright registration, domain name registration and dispute resolution, as well as patent drafting. His languages include Chinese and English.